From GDP to jobs creation: 2017 was year of unfulfilled expectations; will 2018 fare better?

Economic forecasting has become an even more inexact science as one is never sure if there could be shocks engineered by the government in the form of big-bang reforms or from outside like oil price hike, which can upset the models. The best guess is that it could be just as precise as the monkey throwing darts at the board. We end up saying that the next year will be better than the one gone by, though one is never sure why this should be so. To quote the words from the vintage classic song ‘Only yesterday’ by the Carpenters – ‘Tomorrow may be brighter than today, since I threw my sadness away’. Last year it was assumed that life would get better in FY18 and that the economy would be back on its feet and on the takeoff path. But these expectations were built more on hopes than economic rationale and have remained largely unfulfilled. Let us see how song has played out. First, GDP growth was expected to be higher this year and the 1 percent growth shaved off in FY17 ostensibly due to demonetisation was to be largely recovered if not bettered. The MOF allayed concerns but hedged the forecast by widening the range to 6.75-7.5 percent. For FY18, the first two quarters are quite a disappointment as a desperate attempt was made to say that growth in Q2 at 6.3 percent was an improvement over 5.7 percent in Q1, even though a like to like comparison was lower than 7.5 percent in Q2-FY17. The fact is that no one is talking of growth of even 7 percent is indicative of the reconciliation with the new reality. While demonetisation was the excuse for FY17, it is GST for FY18 though we are not sure of any lagged effects being there. Second, investment continues to be declining with the private sector staying away. To begin with there is surplus capacity in industry. Further, large companies in infra space are already embroiled in the NPA resolution and new players too would not like to risk fresh borrowings. As a consequence the banking system is moving away from corporate lending and preferring retail lending to avoid NPA build up. The only entity spending is the central government but the amount (about Rs 3 lakh crore) is not adequate. States are now saddled with the UDAY debt that has put pressure on fiscal balances which has been further exacerbated by the loan waivers and pay commission provisions. To top it all, the GST has led to lags in receipt of tax devolutions which has constrained their spending. Third, industry continues to stagnate with growth being just 2.5 percent in the first 7 months as against 5.5 percent last year. The consumer boom that was expected to prevail post a good monsoon and festival season has not quite played out and has been concentrated mostly in the infrastructure and consumer non-durable goods segments. Fourth the fiscal roadmap was supposed to be clear and the global rating agencies have been all praise for the strategy being pursued. However, the recent announcement made on higher borrowings for the year which would be around 9 percent of the targeted fiscal deficit means that we have strayed from the path. GST and lower transfers from the RBI have contributed to the revenue shortfall forcing the government to borrow more now. Hence this strength of the architecture has also become a trifle shaky. Fifth, on the monetary side, everyone is dissatisfied. Borrowers and banks want interest rates to be lowered and the RBI is rightly not obliging. Savers are unhappy as rates have come to such a level that it makes no sense to put money in deposits. The icing has been provided a few days back when the interest rates on small savings have been reduced, which ironically comes at a time when G-Sec rates have started rising and look likely to remain at elevated levels. It is not surprising that mutual funds and equities have been preferred by households leading to abnormal valuations in the market as corporate performance has been weak. Both sales and net profits have stagnated or decelerated which should ideally not lead to rising prices. But this anomaly is mainly due to over investment in equities and the fear of a correction looks both likely and scary. Sixth the banking system is still in disarray with the IBC-NCLT combination addressing the issue with some sense of urgency. A consequence has been that the large borrowers are out of the market and the smaller ones not preferred by banks. Therefore, growth in business is limited to the retail segment. There is still some concern as to how this would play out finally with insolvency resulting in the sale of assets, which in turn could come in the way of risk-taking by entrepreneurs. Seventh, we are still waiting for exports to grow. Since 2014 growth has been low after growing by around 12-15 percent in the previous years. In the last three years it has gone into the low positive or negative territory and the positive growth witnessed this year so far still cannot be interpreted as a recovery or a move to the normal path. The strong rupee has not been much comfort for exporters even as the rupee remains one of the best performing currencies. Eighth, demonetisation was to have gotten in black money, transfer cash into the accounts of the poor, increase the tax base and number of tax assesses. The numbers on these objectives are still not known one year after this bold measure was taken which can lead to some scepticism on whether it was worth the trouble. Cash is back into the system, and while PAN and Aadhaar have become all pervasive, cash payments still rule in sectors such as real estate, gold, automobiles (second hand) and consumer durable goods. Ninth, GST has become a major disruption not just for tax payers but for the government too due to the volatile nature of collections. While flows will smoothen over time, the immediate repercussion has been on the fiscal balances leading to higher borrowing. Last, while India can still claim to be one of the fastest growing economies in the world, a major concern is that employment numbers have not been satisfactory. The SME segment has witnessed a double whammy with demonetisation the GST resulting in substantial distortions in employment. Unless the economy revives, growth in job creation will be sluggish. Downsizing is still prevalent as companies are using this route to protect profit margins. Therefore, when one looks back on 2017 it does appear that several expectations that were formed at the beginning of the year have not quite been realised. While the framework for business is in place and the nation has made progress in terms of not just improving its rank in Doing Business as also a ratings upgrade form Moody’s we may have to wait for another year to see real improvement. The external factors like monsoon and crude oil price will still hold the reins as we enter the New Year. (The writer is chief economist, CARE Ratings. He authored ‘Economics of India: How to fool all people for all times’. Views expressed in this article are his personal opinion.)